In small economies such as Ireland, the traded sector is normally the leading sector for any economic development. In any bid to resurrect the economy from the depression which we have recently experienced, all reforms are aimed to surge the private sector so that the population can be able sustain itself.
The government of Ireland in their efforts to resurrect the economy has been working with the IMF and the EU in making the progress on the European policy reforms including the banking union which is very critical to the European and global confidence. The government negotiated with the EU/IMF. They requested for financial support from the European Union. The European Union through the European financial stability facility (EFSF) and IMF accepted the request to capitalize the economy.
In the above respect, the government agreed to the provision of € 85 billion in financial support by the member states of the European Union and IMF on specific conditions that were drawn from Ireland’s own programme. The aim of this move was to return the economy to its sustainable growth, achieve fiscal consolidation and ensure that there is a properly functioning healthy banking system. This has boosted the market confidence in the banking sector and restored market access at reasonable interest rates. In fact this programme has met its targets and the economy is off to a strong start.
The government has worked with external and internal entities to achieve this. For example in raising the € 85 billion, the European financial stabilization mechanism contributed € 22.5 billion, the European financial stability facility contributed € 17.7 billion, the bilateral loans from countries like united kingdom, Sweden, Denmark raised € 4.8 billion and IMF contributed € 22.5 billion. The state itself contributed € 17.5 billion of the total from national pension reserve fund and other domestic cash resources.
The efforts for the recovery of the Irish economy have also drawn in public finance policies. Through the government efforts, this is now moving into the right direction after a number of difficult years. There was a recorded underlying general government deficit of 9% of the GDP in 2011 which was still inside the set EU/IMF programme of financial support. The developments in 2012 exhibit a further stabilization in public finances with the exchequer revenues which are running ahead of profile. The government’s intervention has also met the EU/IMF programme exchequer primary balance target for the end of third quarter of 2012.
The government under the adjustment programme and commitment of the European Union partners in the 29th June 2012 summit statement regained credibility with its strong performance. Ireland is now therefore returning to market funding and over the summer months of 2012, investors committed almost € 5.25 billion to longer dated bonds that are maturing in 2017 and 2020. This follows on the previous bond swap in January as well as the resumption of treasury bill issuance at the beginning of the third quarter of 2012. These developments have marked a very significant step for Ireland to full bond market access which have reduced short to medium term funding requirements significantly.
The Irish government has tried all avenues of resurrection of the economy. Some of the measures have included the attraction of foreign direct investments in the country especially by luring companies from the United States and other developed countries which has been instrumental in proving employment opportunities and increasing the liquidity of the institutions in the country. It is worth noting also that the government has been able to put in place policies where workers retiring from employment can forfeit part or the whole of their pension until such times when the economy of the country is sustainable enough to support. In the same spirit, the government lowered corporate taxes from businesses so that these businesses can create more employment opportunities.
The government and the public sector unions also negotiated the Croke Park Agreement which provided for the increased productivity, flexibility for the economy. This has seen increased savings from the public sector in exchange for further pay cuts and reduced layoffs which have kept more of the people in their jobs.
With respect to internationally traded goods and services, their net value in 2011 was equivalent 188% of the gross domestic product which amounted to € 159 billion. There is an increase in the importance of the internationally traded goods of 3.5%. There can’t be any better indication of success that any country can show besides the improvements in its exports as evidenced by Ireland in this paragraph.
Irish Bailouts. The Irish businesses like the Irish motor industry, Irish hospitality industry along with many others in the industry and business sector have benefitted from government support in an equivalent to business like version of social welfare. The European central bank has been in support of the same as it has done the same with other troubled economies in countries like Italy, Portugal, Greece, Spain, and others.
The National Asset Management Agency (NAMA) was established by the Irish government in November 2010 to manage financial instruments like loans from banks to enable them return to normal liquidity to assist in the economic recovery for the country. This has assisted in deleveraging by purchasing portfolios of non-risky loans like land and development loans from participating institutions. Towards the end of March 2011, NAMA had acquired over 11,000 loans from more than 850 debtors with a value of € 71.2 billion. The participating institutions have received close to € 30.2 billion in government guaranteed securities and this has significantly improved institutions’ liquidity positions. However this is on the background that it is difficult to realize the Irish land and developments which represents 27% of the Irish total portfolio.
(b) The Main Macroeconomic policies of the Irish government and the European central bank
For any sound economy, the government in collaboration with financial regulatory institutions in the internally and externally especially in the region put in place policies for the good financial regimes. These policies range from structural to fiscal adjustments. Some of these are mentioned below.
Reforms are a key element of the EU/IMF programme. These reforms have supported and sustained fiscal consolidation. The government through these reforms has established the fiscal advisory council whose aim is to see budgetary discipline. This has seen enhancing the credibility of the country’s budgetary process and is lending strong confidence to the people’s effort. Such reforms have boosted the economy’s medium term growth potential. These reforms have focused on measures that have raised competitiveness and job creation enhancing. The government has therefore;
1. Promoted the service sector through actions to remove the remaining restrictions on trade and competition to allow free trade zone
2. The government has undertaken an independent assessment of the electricity and gas sectors and with a view to improving their efficiency. This goes a long way improving the needs of industries that provide goods and services and employment for more job seekers.
3. The government has also introduced changes to facilitate re-adjustment in the labour market and created greater incentives to take up employment. This can keep people busy and with money to spend.
The government’s initiative as began in May 2011, outlined a number of measures to assist employment generation, has provided opportunities for the citizens who lost jobs and also to generate confidence in the economy. These measures have included among other things
1. The measures to support employment in labour intensive tourism sector including the introduction of temporary second reduced rate of VAT at 9% and the suspension of air travel tax. This attracts more people to the sector.
2. The government has also lowered the rate of employers’ PRSI which has been halved till the end of 2013 on jobs that pay up to € 356 per week. This eases the consumer’s expenditure and increases market for goods and services.
3. The Irish government has also made over 20,000 positions available for training, education and improving skills, adding to significant activation measures for the economy as announced in 2010.
4. There have been planned expenditure re allocation of capital expenditure towards the more labour intensive training, while some additional capital expenditure have also been introduced.
However, due to finance difficulties, the cost of these measures have been financed through the introduction of temporary levied on funded pension schemes and personal pension loans. This is also done to ensure budget neutrality over the period up to 2014 and these have not hindered the economic recovery of the country that is just but taking hold.
The government has stabilized the banking sector throughout 2012. In a follow up to € 24 billion recapitalization of the sector in 2011, more significant balance sheet restructuring has also been achieved during 2012 to the extent that some of the targets set have been achieved during 2012 to the extent that the targets set for the banks for 2013 have already been met.
The EU has changed the banking supervision mechanism to the extent that ECB has been given the supervisory powers over all the banks in the union. This is an important step in relation to recapitalization of banks. Discussions are also on going to put equity and elements of Irish debt recapitalization and restructuring on a more sustainable level. This will go a long way to instill discipline in the banking sector. It is worth noting also that strong policy actions and major advancements in the EU institutional frame work have averted a far worse outcome and also brought about an easing of the financial market tensions as well as stabilization in confidence at the beginning of 2012.
Performance of the European Central Bank. It can be generally acceptable that the European central bank has performed well in delivering pricing stability for the aggregate euro trade economy. In relation to stability, it can also be accepted commonly that liquidity operations of the ECB since the onset of the global financial crisis in the summer 2007, have been very good as compared to the Federal Reserve and the Bank of England. This is so bearing in mind the previous European financial regime would have delivered a non-coordinated monetary policy response that would generate inappropriate shifts in intra-European exchange rates besides the non-optimal degree of collective monetary adjustments for the whole trade zone.
The Irish economy has also participated in monetary union for the reasons outlined in this text. It also benefits from the macroeconomic efficiency gains associated with a single economic currency. It can also be noted that the nature of the currency union is that the ECB cannot respond to every country-specific shocks and or international shocks that affect individual member countries in various ways.
Repairing the Banking System
Banks have also been adequately capitalized over the last two years by the Irish government which has contributed over € 46.3 billion of capital to the domestic banks. This also includes significant contributions to the cost of recapitalization for debt holders by the sale of assets to generate capital and also by sourcing funds from private sector investors. In addition, an element of capital has been provided on contingent basis which can be returned to the state in case it is not required. This is to the tune of € 3 billion.
It can be said that the economy is emerging from one of the deepest recessions that has ever been recorded in the developed world and the GDP is expected to grow once again this year. This has been a crucial stage for the citizens but more crucially have remained cohesive, sharing the understanding of their economic problems which have left their strengths intact despite the fact that any policies put in place affect the common person in most cases adversely. It is also important to note that the financial assistance programme is on track and the government has concluded the first and second quarterly reviews. This has led to external partners like EU through the ECB to conclude that Irish implementation is strong even if there are challenges lying ahead.
1. Philip, R. Lane “Macroeconomic Adjustment and Fiscal Policy in Ireland” November 2009.
2. Kathryn, M.E, Dominguez “European Central Bank, the Euro, and Global Financial Markets” Journal of Economic Perspectives, Vol. 20 November 4, 2006
3. National Economic and Social Council “European Monetary Union and Macroeconomic Policies in Ireland.
4. The Economic and Social Research Institute www.esri.ie/irish_economy
5. Murphy,E.Robert “An Analysis of Ireland’s Economic growth Performance” Robert Schuman Centre for Advanced Studies. RSC No 2000/16